Brad de Long wants government to borrow $500bn to spend on infrastructure.

The US government can currently borrow for 30 years at a REAL rate of interest of 1% (i.e. after taking inflation into account). Brad de Long wants government to borrow $500bn to spend on infrastructure.

Now what’s the point of borrowing money (even at 1%) when you can print the stuff at no cost? Of course the knee jerk reaction to the phrase “print money” is “inflation”. But as David Hume pointed out over two hundred years ago, money supply increases are not inflationary except to the extent that they are spent: i.e. except to the extent that they increase demand. And all demand is ultimately demand for labour.* Thus creating jobs for X people as a result of printing will be no more inflationary than creating jobs for X people as a result of borrowing.

Of course the demand stemming from that extra money may cause excess inflation in two years time: especially if there is a significant rise in demand for US exports or a rise in consumer confidence. But in that case the extra money will just have to be reined in via extra tax (and/or less public spending) and “unprinted”. Pretty much the same scenario obtains if the “borrow” option is adopted: that is, given excess inflation, governments can raise interest rates, which involves the central bank selling government bonds and withdrawing money from the private sector.

Second, infrastructure projects get trotted out every time there’s a recession – Pericles advocated the idea in ancient Greece two and a half thousand years ago. Now why does the optimum mix of infrastructure and other forms of public and private spending change just because GDP expands a bit slower than normal? It doesn’t! In short, an ALL ROUND increase in spending, public and private, is preferable to the bizarre collect of pet projects that politicians, economists, greens, etc etc come up with every time there’s a recession: infrastructure schemes, windfarms, bridges to nowhere – the list is endless.

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*Reason why all demand is ultimately demand for labour is as follows. First, I’ll cheat a bit and classify profits as the “wage” of a particular type of labour: the entrepreneur.

The cost of anything is made of the cost of the capital equipment, materials and labour needed to make it or supply it. And in turn the cost of the latter capital equipment and materials is made up of the cost of the capital equipment, materials and labour needed to make it or supply it. And in turn the cost ………you get the picture.

Ultimately, 100% of the cost of anything is the cost of the labour. Or if you don’t like classifying “profit” as “labour”, then 100% of the cost anything is the cost of labour and entrepreneur’s “labour”, i.e. profit.

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